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Tom Essaye Quoted in Yahoo News on March 14th, 2023

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US Stocks Shake Off Market Jitters; Bonds Fall: Markets Wrap

Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, expects that the data will keep the Fed on track to raise rates 25 basis points next week.

“Given the bank troubles, this report isn’t bad enough to put 50 bps back on the table, but if the Fed wants to maintain credibility on inflation, then this report says they have to hike again next week and not signal they are done,” Essaye wrote. Click here to read the full article.

 

How (and Why) We Calculate Real Interest Rates

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What’s in Today’s Report:

  • How (and Why) We Calculate Real Interest Rates

Futures are moderately lower following a disappointing night of earnings.

Thursday night was the first bad night of earnings as SNAP and WHR both posted underwhelming results, while numerous European companies also missed estimates.

Economically, the Japanese CPI ran hot (3.0% vs. (E) 2.9%), like virtually every other inflation indicator this week.

Today there are no economic reports and just one Fed speaker, Williams (9:10 a.m. ET), but he shouldn’t move markets.

Instead, the focus will continue to shift toward earnings and the markets needs some good results to rally today.  Reports we’re watching today include: VZ ($1.28), AXP ($2.38), SLB ($0.55), HCA ($3.89).

Will Inflation Start to Peak This Week?

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What’s in Today’s Report:

  • Updated Market Outlook
  • Weekly Market Preview:  Will Inflation Start to Peak?
  • Weekly Economic Cheat Sheet:  Key Inflation Data This Week

Futures are modestly lower as Chinese inflation stayed high while the Russia/Ukraine war may be intensifying.

Chinese PPI rose 8.3% vs. (E) 8.1% while CPI gained 1.5% vs. (E) 1.4%, underscoring that inflation has not yet peaked in China.

Geo-politically, Russia is poised for a large assault on eastern Ukraine and analysts are anticipating some of the more intense fighting of the war.

Today there are no economic reports but there are several Fed speakers including Bostic (9:30 a.m. ET), Williams (12:00 p.m. ET) and Evans (12:40 p.m. ET) and we expect them to continue the trend of guiding markets towards a 50 bps hike in May and endorsing the idea of 250 basis points of tightening by year-end (but that shouldn’t move markets as that is already well known).

The Real Impact of Rising Rates

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What’s in Today’s Report:

  • What’s the Real Impact of Rising Rates?
  • Chart: 5-Year Inflation Expectations Hit New Highs

Stock futures are modestly lower with EU shares this morning as traders digest the strong post-Fed rally amid hawkish Fed speak and still elevated tensions surrounding Ukraine.

Geopolitically, talks of new sanctions on Russia by the West, including on the energy sector, are acting as a mild headwind on risk assets today.

Economically, the latest U.K. inflation data ran hot with CPI jumping to 6.2% vs. (E) 5.9% in February, a fresh 30-year high.

Today, there is one economic report due out: New Home Sales (E: 810K) but it shouldn’t move markets leaving focus on the Fed as Chair Powell is scheduled to speak at 8:00 a.m. ET. Loretta Mester and Mary Daly will also speak at 10:00 a.m. ET and 11:45 a.m. ET, respectively.

Finally, there is a 20-Year Bond auction at 1:00 p.m. ET that could move Treasury yields.

Bottom line, stocks are showing some signs of exhaustion after a strong one-week rally in the wake of the March Fed meeting, and any additionally hawkish Fed speak or negative news flow surrounding the Ukraine war could see the selling pressure pick up as near term traders book profits on recent gains.

Early Earnings Season Takeaways

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What’s in Today’s Report:

  • Early Earnings Season Takeaways

Futures are modestly higher as China made two surprise interest rate cuts overnight, helping stocks bounce from Wednesday’s late-day declines.

China’s central bank made two small surprise interest rate cuts overnight which helped Asian stocks rally (Hang Seng up 3%) and that’s pushing U.S. futures higher.

Today focus will be on economic data and earnings, and for stocks to extend the early morning rebound we need to see stable data and solid earnings (meaning no extreme cost pressures).  Economically, the key report today is the  Philly Fed Manufacturing Index (E: 19.1).  If it suddenly plunges as Empire did on Tuesday, that will slightly increase anxiety about the economy.  We’ll also be watching Jobless Claims (E: 207K) and Existing Home Sales (E: 6.40M).

On the earnings front, the key report today is NFLX ($0.82) after the close, but we’ll also be watching:  AAL (-$1.54), TRV ($3.86), UNP ($2.60), CSX ($0.41) and PPG ($1.19).  If margins are much weaker than expected, look for more earnings-related volatility.

FOMC Preview (Will the Fed Confirm the Rally?)

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What’s in Today’s Report:

  • FOMC Preview – Will the Fed Confirm the Rally?

Futures are modestly higher as stocks rally off dovish comments by ECB President Draghi and again ignore more ugly economic data.

In a speech Draghi said the APP (the EU QE program) had a lot more “room” implying it could be re-started, and that helped global equities rally modestly.

Economic data, meanwhile, was again ugly.  German ZEW Business Expectations collapsed to –21.1 vs. (E) -9.3 while Euro Zone exports missed estimates at –2.5% vs. (E) -1.2%.

Today will likely be dominated by pre-Fed positioning and trading should be quiet, although there’s always the chance we get a U.S. – China trade update as the G-20 draws closer.  Economically there is just one report, Housing Starts (E: 1.240M), and it shouldn’t move markets.

ECB Announcement Takeaways, July 21, 2017

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ECB Announcement Takeaways

  • The ECB left key interest rates unchanged.
  • The monthly QE program remains 60B euros
  • Forward guidance was left unchanged from the June statement.

Takeaway

As expected, the ECB left all major policy decisions as they were at the July meeting, including interest rates, QE and a lack of any material new forward guidance. The initial reaction to the statement was dovish, as policymakers appeared to simple “kick the can” toward the September meeting.

But, Draghi’s press conference following the statement offered more mixed signals. First, the ECB President reiterated his upbeat view of the European economy, which is slightly hawkish, but did mention that he and other policymakers remain cautious about the lack of inflation. To that point, Draghi repeated his pledge to increase QE in both size and duration should the economy falter or financial conditions worsen. This was largely expected, but it offered a dovish reminder. At this point in the press conference, the release was still a wash.

The catalyst for the surge in the euro, which gained well over 1% in intraday trade, was actually due to the lack of attention Draghi gave to the recent strength in the currency. He had several opportunities to address the recent gains in the euro, which hit multi-year highs earlier this week.

Yet the failure to do so was enough for currency traders to chase the shared currency up to new highs.

Bottom line, the ECB effectively “kicked the taper can” to the September meeting, which means unless Draghi verbally suggests otherwise between now and then, any changes will likely be very subtle (i.e. modest taper to QE but extended duration). That was underscored by the fact that the 10-year bund was essentially unchanged yesterday. Looking ahead, the ECB still is a long way off from actually tightening policy (as they are technically still actively easing with their QE program) and as such, the rally in the euro is getting a bit extended. Nonetheless, the trend remains bullish for the euro, and until there is a catalyst such as blunt, less-dovish commentary from Draghi or a spike in EU inflation, then the path of least resistance will remain higher for the euro.

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Market Implications of Fed Vice Chair Dudley’s Optimistic Statements

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What are the market implications the optimistic statements from Fed Vice Chair (and President of the Federal Reserve Bank of New York) William Dudley’s optimistic statements this week?

Fed Vice Chair Dudley reiterated and bolstered Fed Chair Yellen’s “steady as she goes” message on rate increases last week, again dismissing low inflation as not a big enough problem to stop the Fed from continuing to hike.

Additionally, Dudley was optimistic about economic growth, saying he was “confident” the current economic expansion had plenty left in the tank.

Bottom line, Dudley reiterated that the Fed is committed to raising interest rates and removing accommodation, and that caused a mildly “hawkish” reaction across currencies and bonds.

It also helped push stocks higher (although stocks were already in rally mode). So, our general Fed outlook remains the same: Balance sheet reduction starting in September, and a rate hike in December.

However, in order for the hawkish tone from the Fed to get the Dollar Index and yields moving higher, we’ll have to see actual improvement in the economic data, and that remains elusive. As such, the market remains skeptical about future rate hikes, despite the Fed’s warnings (Fed fund futures are pricing in just a 20% chance of a September hike, and 40% chance of a December hike). So, the Fed has some work left to do on reestablishing its hawkish credibility after years of ultra-dovishness.

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Fed Takeaways: What the Hike Means for Markets, June 15, 2017

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FOMC Decision: The Fed increased the Fed Funds rate 25 basis points, as expected.

Wednesday’s Fed decision was not the dovish hike the market was expecting, although it wasn’t exactly a hawkish decision, either (even considering Yellen’s balance sheet surprise). Looking at the statement, the Fed wasn’t as dovish in its language as the consensus expected. The economic growth language remained good, and actually improved a bit from the May statement.

The inflation language, as expected, was downgraded, but the Fed refrained from changing the characterization of risks, and left them “roughly balanced.” That’s Fed speak for “any meeting is live for a rate hike.”

However, the Fed did note the undershooting of inflation recently, and explicitly said they are monitoring inflation, meaning if it continues to underperform they will react with easier policy. For now, the best way to characterize the statement is “steady as she goes,” with regard to the Fed’s current outlook.

Wildcard to Watch: Balance Sheet Reduction

We were right to make this our wildcard to watch, as the topic of the balance sheet provided the only real surprise in yesterday’s Fed meeting.

Importantly, the Fed gave guidance on all three major balance sheet related questions: When will it reduce the balance sheet? How will it reduce the balance sheet? What holdings will it reduce?

What will it reduce: The Fed revealed that it will simultaneously reduce holdings of both Treasuries and Mortgage Backed Securities, which was generally expected.

How will it reduce its balance sheet: The Fed will implement a rising monthly “cap” on principal reinvestments. What that means, practically, is the Fed will not reinvest the first $6 billion of Treasury principal and the first $4 billion of MBS principal, making it a total of $10 billion that it won’t reinvest each month, at least initially. That cap will rise by $10B every three months, so one year from the start date (which will likely be September), the Fed will no longer be reinvesting $50B worth of bond principal payments per month. That number and this escalation is not surprising, and was close to in line with most forecasts (i.e. this wasn’t “hawkish.”)

When will the Fed start Reducing the balance sheet: This was the surprise, as Fed Chair Yellen said balance sheet reduction could start “relatively soon.” That is sooner than expected, as the consensus was the Fed would hike rates again in September, and start to reduce the balance sheet in December. Now, that may be flipped.

Since reduction of the balance sheet is like the Fed hiking rates, this was taken as mildly hawkish, and the dollar bounced along with bond yields. However, this surprise is not a hawkish gamechanger, and won’t alter anyone’s outlook on Fed policy going forward.

Bottom line, for all the noise and production yesterday, the Fed outlook remains broadly the same: One more rate hike and balance sheet reduction in 2017, unless inflation metrics get much worse.

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This Week’s Fed Decision Takeaway and Rate Hikes To Come, May 4, 2017

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The Fed made no changes to interest rates this week, as expected.

Fed Decision Takeaway

The Fed statement almost perfectly met our “Meets Expectations If” scenario, as the Fed acknowledged the slight loss of economic momentum since March, but stated it viewed the slowing as only temporary, and left the door firmly open for a rate hike in June.

Looking specifically at the statement, the Fed said yesterday that economic activity had “slowed” compared to “expanded at a moderate pace” in March. But, in the second paragraph, the Fed said the loss of economic momentum appears to be “transitory,” and signaled the recent underwhelming data won’t make the Fed deviate from future rate hikes.

Underscoring that point was the fact that the Fed said risks to the near-term economic outlook continue to be “roughly balanced,” which is Fed speak for “we can hike rates at any meeting going forward.” Bottom line, the Fed was not spooked by the recent soft data and it is not deterring them from any future rate hikes… yet.

From a market standpoint, there was a mild “hawkish” reaction, not so much because the statement was hawkish, but instead because there was nothing dovish in the statement. That’s what markets have become conditioned to expect. The Dollar Index drifted to the highs of the day 30 minutes after the statement while the 30-year Treasury erased small gains and closed fractionally lower. Stocks drifted slightly lower, but selling was mild. Overall, the Fed statement was not a market mover.

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